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This Just In: Upgrades and Downgrades

Barclays says Google is No. 1.

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

We're No. 1!"We" being the American Internet economy, that is. Yesterday, Barclays Capital assigned a "1-positive" rating to the U.S. Internet sector, initiating coverage of five big-name I-stocks. The list included two winners -- Google(Nasdaq: GOOG) and Netflix(Nasdaq: NFLX), both rated "overweight," and three runners-up -- Yahoo!(Nasdaq: YHOO), Amazon.com(Nasdaq: AMZN), and eBay(Nasdaq: EBAY), all rated "equal weight."

Bullish overall on the sector, Barclays cited worries on these three latter names:

Yahoo!, while a "recognizable" brand name, is said to be losing market share in search.

eBay has a good thing in PayPal, but aside from that has little going for it as its "Marketplaces" business seems to be struggling.

Amazon gets high marks for its dominant position in e-retailing, but Barclays worries its profit margins aren't up to snuff.

Best of the bestIn contrast, Barclays sees very little not-to-like about Netflix, and even more especially, Google. On the former, Barclays predicts a long-term trend of TV viewers moving online for their video-viewing pleasure. Now that Netflix is finally streaming flix over the 'Net, that's good news for the company. But in Barclays' view, the story gets even better at Google.

For one thing, the same shift in viewing patterns that benefits Netflix will work to Google's advantage as the owner of YouTube. For another, Barclays notes that the "average U.S. consumer spends 36% of overall media time" on the Internet, yet U.S. advertisers are still spending just 15% of their ad dollars online. As advertisers begin to wake up and smell the Java, Barclays believes we'll see a long-term trend of 14% annual spending growth on Internet ads. And as Google is the proverbial 800-pound gorilla in this space, it stands to benefit more than smaller players like Microsoft(Nasdaq: MSFT), ValueClick(Nasdaq: VCLK) … and of course, Yahoo!.

According to Barclays, this trend is all but certain: "In media, dollars have always eventually followed eyeballs."

Let's go to the tapeIs Barclays right about that? If history's any guide, the answer's got to be "yes." We've been tracking the success rate of Barclays' picks for nearly three years now, and according to our CAPS stats, not only is Barclays a superb stock picker -- it's literally one of the best stock pickers on the Street.

Our database shows that over the past three years, 56% of Barclays' recommendations have outperformed the market. Its average margin of outperformance: more than 16 percentage points!

Foolish final thoughtI have to tell you, folks -- hearing Barclays full-throated roar of approval over Google just warms the cockles of this Fool's heart. You see, I've owned Google for some time now. It's been a profitable investment for me. But lately, I've begun to have some doubts as to whether Google still deserves my investing dollars …

Not because of the recent decline in share price, mind you. To the contrary, a cheaper Google would make me more eager to buy shares, rather than less. What worries me is the fact that Google's capital spending has grown significantly in recent years, with the result that its free cash flow declined from a high of $8.5 billion two years ago, to just $7 billion cash generated over the last 12 months.

Today, Google generates less free cash flow than it reports as "net income" under GAAP. Its price-to-free cash flow ratio of 24 doesn't look like much of a bargain relative to consensus growth rate estimates for the company of just 17.8%. On the other hand, if Barclays is right about the impending surge in online ad growth, that "consensus" estimate could prove to be conservative. (Overall industry growth of 14%, plus Google grabbing share from its rivals at every turn should equal a much higher growth rate for the company.)

Now, I don't know that it will happen. Based on Barclays' record, I hope it will, and I'll trust in the analyst's judgment and hold onto my Google shares a bit long. I'll trust … but I'll also verify.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.